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Why Gas Costs So Much In Maryland

This article originally appeared in the Washington Post on May 1, 2005.

Price-shocked Maryland motorists are studiously watching gas station signs, looking for cheap fuel. But they’re not finding much difference from one station to the next. The reason why is a fascinating tale of Annapolis favoritism.

The story begins with the 2000 oil crunch, which sent gas prices soaring. Consumers responded by avoiding service stations and buying lower-priced gas from retailers like Sheetz and Wawa.

The two convenience store chains were aggressively expanding into Maryland at the time and the queues at their pumps worried service stations owners. The owners appealed to state lawmakers for help, knowing that Annapolis has a history of restricting price competition to protect politically favored businesses.

The result was a 2001 law prohibiting retailers from selling gas below state-established minimum prices derived from weekly wholesale prices. The law empowers the state comptroller to investigate reports of cheap gas and suspend or revoke the license of any retailer caught offering too-low prices.

The law’s supporters say it is necessary to prevent “predatory pricing” in which one retailer undercuts competitors to drive them out of business and then raises its prices. But I’ve not heard of an instance in which Sheetz or Wawa has engaged in predatory pricing, and economists generally consider the strategy to be unworkable. For the most part, the only people who believe in predatory pricing are politicians and business owners who want protection from low-priced rivals.

Sheetz and Wawa fought the legislation, but in vain. It passed both houses of the General Assembly by overwhelming margins and was signed into law by Gov. Parris Glendening. Comptroller William Donald Schaefer later sent letters to the editors of several Maryland newspapers proclaiming the law to be “good for the consumer” and assuring motorists that it would not cause higher prices.

When the law went into effect that October, Sheetz and Wawa raised their prices.

What would Maryland gas prices be like if the legislation were repealed? A loophole in the law gives an indication. A retailer can lower its price below the minimum “in good faith to meet competition.” That is, though a retailer risks violating the law if it is a first mover in discounting gas, the retailer can lower its price below the state minimum if a competitor has already done so.

Earlier this month in St. Mary’s County, this appears to have happened. On April 18, one Wawa was selling regular unleaded for $1.99; the nearby Sheetz was selling it for $2.00. In response, the Texaco and Shell down the road lowered their prices to $2.00 a gallon. In contrast, the state-wide average price was $2.22.

Maryland motorists likely would be happy to pay $2 a gallon. And they might wonder what was so wrong with cheap gas that Maryland went and passed a law against it.